Historic evidence since 1951 suggests that labor markets respond only slowly to tighter monetary policy. After a surprise hike in the federal funds rate, the vacancies-to-unemployment (V/U) ratio, a popular measure of labor market tightness, declines by an estimated 0.26 percentage points over 24 months. This slow cooling of the labor market is in line with the current tightening cycle. Since the Federal Reserve started raising the policy rate in March 2022, the V/U ratio has only declined from about 1.9 to 1.5 so far and is still well above the pre-pandemic average of about 0.8.
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